1 year ago

Opportunity Issue 99

  • Text
  • Industry
  • Trade
  • Investment
  • Africa
  • Business
  • Sadc
  • Sacci
  • Wwwglobalafricanetworkcom
  • Opportunities
  • Enterprise
  • Industrial
  • Businesses
  • Sector
  • Global
  • Economic
  • African
Opportunity magazine is a niche business-to-business publication that explores various investment opportunities within Southern Africa’s economic sectors and looks to provide its readers with first-hand knowledge about South African business. Opportunity also looks to present South African business to international markets that may have interests in investing in South Africa. The publication is endorsed by the South African Chamber of Commerce and Industry (SACCI).


AGRICULTURE TECHNOLOGY IS REDUCING RISK IN AGRICULTURE INVESTMENT Andrew Wood of Primocane Capital looks at the subsectors which can drive export growth, make inroads into unemployment – and earn good returns. Over the last few decades technology in agriculture has greatly reduced many of the traditional risks associated with the industry. Risk has not been completely removed from the equation and agriculture is still a price-taker, but the sector is no longer subject to the whims of nature, which makes for an exciting Southern African investment opportunity. Fruit and nuts – being primarily export crops – are a natural hedge and will generate billions in forex and create many jobs on a continent that is in dire need of both. South Africa’s agri sector Agriculture contributes less than 3% to GDP and 10% (R160-billion) of the country’s total exports. SA imported R114-billion in agricultural and food products in FY 2018. The private sector has been the main and only driver in agricultural development since democracy and this has slowed down appreciably over the past decade. Farmers are taking a more conservative approach to reinvestment in crops and growth. With policy certainty and improved government support, the industry will see positive private-capital investment. South Africa has a wealth of land and water resources to serve agricultural expansion. Most importantly, the country has the labour required to support this growth. The sector can provide a source of employment for the segment which has the highest unemployment rate. Focused agricultural opportunities Blueberries The global blueberry market has seen tremendous growth in demand over the past five years and this growth is continuing. New markets such as the Far East are currently being explored and hold the promise of enormous growth. South Africa has a small blueberry production footprint but holds a strong reputation for producing high-quality fruit. The country’s geographical location allows the export of blueberries into Northern Hemisphere markets when no other supply is available – a unique export window. South Africa’s major export markets are currently the UK and Europe, with some fruit going to Malaysia. The investment case for blueberry development is compelling and even though it requires large sums of capital, it provides strong returns. Its business model suits emerging market investments well because it is a natural hedge to ZAR depreciation, where revenue is generated in foreign currency and costs are incurred locally in ZAR. There are opportunities to structure the business to maximise FX gains. Blueberry farming generates 25 seasonal jobs per hectare, five development jobs per hectare and 1.5 permanent jobs per hectare. It is the biggest job driver in the agricultural sector. Medical cannabis Since the 1920s, cannabis production has been prohibited or seriously curtailed in most parts of the world. The global trade in cannabis for medicinal purposes is presently strictly regulated by the Single Convention on Narcotic Drugs 1961, the Convention on Psychotropic Substances of 1971 and the United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988. Countries that allow the cultivation of cannabis for medicinal purposes strictly regulate the industry through a licensing system. This means that supply is restricted. Restricted supply leads to monopolistic or oligopolistic circumstances and higher prices for consumers. These high prices allow for production of cannabis in almost any legal jurisdiction, regardless of climate. South Africa offers a climate where production and 64 |

AGRICULTURE capital costs are significantly lower than North America. This makes South Africa a more sustainable location to invest. Global consumers spent US.2-billion on legal medicinal cannabis products in 2017. This figure is forecast to grow to US-billion in 2027, based on increasing medical prescription and as medicinal cannabis products become standardised and better researched. This growth is mirrored across the rest of the world with more countries legalising medicinal cannabis. The UK did so in 2018. Australia and other African counties are in the process of passing legislation that will facilitate growth and access to the expanding global market which is estimated to be worth US-billion and is expected to grow to US5-billion by 2025. As with all agricultural development and expansion into Africa, the objective is to take advantage of lower production costs. Research indicates that, at current wholesale prices, against a wholesale price of 100, the average cost of production in North America is 68. In contrast, the cost of production in South Africa on the same scale is 25. Cannabis prices will fall over time as the arbitrage opportunity created by differing regulations in different countries falls away. When that happens, low-cost producing countries such as South Africa will be in a good position. Avocados and macadamia nuts The outlook for avocado and macadamia markets appears very positive. Avocado market penetration in the EU is only 29% of that of the USA, and if this were to be equalised, almost four times current production volumes would be required to cater for this market alone. New markets are also emerging in China and India, and with the explosive growth that is expected in these markets it is anticipated that production will battle to meet demand over the next 10 to 15 years. For the first time, there is also generic avocado marketing in the EU, funded by all of the suppliers into this market. The campaign is already reaping significant benefits. Macadamias comprise only 1.5% of the whole-tree nut market, so in spite of very large plantings its share of this segment is not likely to grow beyond 2% of the total. This percentage growth is also being retarded by substantial growth in the whole-tree nut sector, primarily as a result of health benefits. Unprecedented demand for NIS (nut-in-shell) from China has resulted in record prices, but there is likely to be a correction as domestic Chinese production grows and NIS imports become limited to only the best quality available. The traditional kernel users have not been able to obtain product at any price in the recent past and the reduced supply to China should benefit this sector. An increase in supply volume, coupled with a decline in price as budgeted, should see this market better serviced with large increases in the macadamia product range within the ingredients sector. This offset should allow macadamias to continue to prosper at more palatable price levels, while still affording growers excellent returns. ABOUT PRIMOCANE CAPITAL Primocane Capital is a business whose primary focus is the development of agricultural assets in Sub-Saharan Africa. An agri-focussed private equity firm, which was established in 2018, it consists of four key members with project management and financial experience relating to the agricultural sector, as well as hands-on growing and project operational experience. Our focus is investing and developing Andrew Wood in niche agri environments that support sustainability and favourable returns. We share a strong belief that investment in agriculture is the key to the development of Southern Africa and the region’s sustainable economic growth. Primocane manages the blueberry farm shown in the pictures on this page, a farm near Barberton in Mpumalanga created by mining company Pan African Resources as part of its community programme. | 65

Other recent publications by Global Africa Network: